Estimating the Holdout Problem in Land Assembly

The Supreme Court's recent decision in Kelo v. New London allows the use of eminent domain to facilitate private economic development. While the court's condition for allowing takings was highly expansive, there may be a market failure that warrants state intervention when parcels of land need to be combined for redevelopment. The collective action or strategic holdout problem associated with land assembly may limit redevelopment of older communities when one or more existing owners seek to capture a disproportionate share of the potential surplus. The problem may be compounded by landowners' uncertainty as to the true value of the expected surplus to be divided (Eckart, 1985; Strange, 1995). At the same time, developers may attempt to disguise the assemblage through the use of straw purchasers. This paper employs administrative Geographic Information System and assessor data from Seattle, Washington, to identify lots that were ultimately assembled. The paper then matches them to their pre‑assembly sales. Controlling for lot and existing structure characteristics and census tract-year fixed effects, I find that land bought in the process of a successful assembly commands an 18 percent premium. Consistent with theory, this premium falls with a parcel's relative size in the assemblage. I also find some evidence that parcels toward the center of the development may command a larger premium than those at the edge, suggesting that developers retain or are perceived to retain some design flexibility.

JEL classification: H8, R5

Key words: holdouts, land assembly, ultimatum game

The author thanks Julia Koschinsky for providing him with data, and he also thanks Chris Jansen of the King County Department of Development and Environmental Services. He also thanks seminar attendees at Georgia State and the meetings of the American Real Estate and Urban Economics Association and the North American Regional Science Council. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.